If the sold call can be bought back for a small amount before expiration, it is usually best to do so, in order to lock in your profit and eliminate exposure to risk.
If you are purchasing stock at the same time you are selling calls, this strategy loses if the stock price drops significantly because to exit a position, you will need to first buy back the call and then sell the stock.
To reiterate, the covered call will profit from the stock's moving up, staying flat, or falling no more than the credit from the sold call. Some people like to use ETFs (exchange traded funds) for covered calls to minimize risk, but that doesn't mean that there isn't any risk.
We hold the position and stock is down around $46 at expiration, so we have a loss, but it is reduced by the amount of the credit of the sold call. In consideration of your time, we'll send the first two chapters of Jon and Pete's latest book, How We Trade Options. When the stock falls below the strike price of the call options by expiration, the call options expire worthless and the entire premium from sale is earned. When you short sell, you are actually selling a security without owning it, hoping that you can buy it later when the price falls and repay your loan.
You like it long term, but don't see it going anywhere over the short term and would consider selling it, given the right terms. They profit if the stock price drops by less than the amount of the sold call, and remain profitable if the stock moves up to or beyond the strike price of the call sold. We want to sell calls on high implied volatility because that is more time decay in our favor.
So in this case it is usually best to wait for expiration and assignment, because buying back the call can be very expensive. The price breaks back above 48 as the implied volatility starts to fall, so we sell the August 49 call for $1.20. This information neither is, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by OptionsHouse. You would also like to generate some income, but you aren't interested in selling your stock only to buy a CD with a next-to-nothing return. But while selling the call brings income to the account, it creates the obligation to sell the stock if the call is assigned.
Meanwhile, if the stock goes to 50.30 at expiration, the call will be assigned and the stock sold. The credit from selling the call gives you small cushion, but not real downside protection.
Because implied volatility (the volatility expectation taken from the options price) is a significant part of the premium paid for an option, if implied volatility goes down, the covered call will profit, and if implied volatility goes up, it will lose. If we had waited, we would have had the $1 profit from the option and $1.50 from the rise in the stock price, a gain of more than 10% for the month (minus commissions and fees). If we decide that we want to get out of the entire position, then we need to first buy back the call, and then sell the stock.
This should not be considered a solicitation to open an OptionsHouse account or to trade with OptionsHouse. OptionsHouse does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. At that point, the full value of the sold call is retained while the stock has achieved its maximum without assignment. Thus, depending on the option’s strike price, writing Call options can be a viewed as a neutral to bearish strategy.
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